Digital RMB Breakdown and Stand Up

Digital RMB Breakdown and Stand Up

As the saying goes, the breakage and establishment of digital RMB point to the past and the future respectively, the breakage is the unresolved reality of pain points, and the establishment is the increasingly clear ascension path.

Digital RMB Breakdown and Stand Up

As the saying goes, the breakage and establishment of digital RMB point to the past and the future respectively, the breakage is the outstanding reality of pain points, and the establishment is the increasingly clear path of ascension.

“Drunkard’s intention is not wine, care about the landscape also.” In May, Alipay launched the digital RMB module for some users, while on the page of choosing to add wallet operators, in addition to the six major banks, the icon of NetShares Bank has also been lit up. This is a good indication that the digital RMB, a hybrid of public and private solutions in the digital economy, is interested in replacing long-established third-party payment institutions, with the intention of higher-dimensional financial stability and monetary competition.
Compared to 2017, when the central bank regulated the potential risks of third-party payment institutions after the fact by “disconnecting” them, the digital RMB is a proactive move ahead of time, and its subsequent impact is bound to be more far-reaching. As the saying goes, “first break and then stand”, the break and stand of digital RMB point to the past and the future respectively, the break is the unresolved reality of pain points, and the stand is the increasingly clear ascending path.

Without breakage, the digital RMB points to three realistic pain points
One is to break the fragmentation of the payment industry and create a fair and open payment environment. The third-party payment institutions relied on the rise of online shopping and took up the responsibility of guaranteeing transactions in the era of lack of trust in online transactions, filling the gap in China’s credit card market with aggregation. Since then, third-party payment institutions have expanded offline around payment scenarios, growing with first-mover advantages and network effects. According to Ariadne Consulting data, China’s third-party mobile payment transaction scale grew to 71.2 trillion in 2020Q4, while Alipay and CaiPay accounted for 93.8% of third-party mobile payment transactions in 2019, forming a “double oligarchy” pattern.

However, behind the prosperity of third-party payment institutions there are three major hidden dangers, or interference with financial stability and security: one is the black box of information, before the “disconnection” in 2017, third-party payment institutions in multiple commercial banks to open equipment payment accounts, while the balance of consumer transaction records within the institution is not transparent; the second is the provision for interest payments, third-party payment institutions to obtain a large amount of liquidity deposited by the user, but does not pay interest on this; the third is over the scope of operation, third-party payment institutions through the provision account opened in multiple banks for interbank fund clearing, disguised exercise of the central bank or clearing organization interbank clearing functions.

In 2017, the regulation launched the “disconnection”, first by setting up Netlink to cover the transaction records of third-party payment institutions, and then gradually increasing the ratio of centralized deposit of provision funds to the central bank, with 100% of provision funds of payment institutions delivered to the central bank on January 14, 2019, so as to effectively prevent the disorderly expansion of credit led by third-party payment institutions. . If the “disconnection” in 2017 was an after-the-fact regulatory response to the potential risks of third-party payment institutions, digital RMB is more like a proactive strike in the race between regulation and innovation, which will reshape the payment landscape from a higher dimension. The digital RMB cedes data sovereignty back to the traditional financial system under the supervision of the central bank, while strengthening the role of market mechanisms in the process of currency circulation. With the gradual failure of Internet companies’ traffic and data advantages, payment barriers and market segmentation at the retail level will likely be broken down, and joint-venture financial institutions will stand at the same starting point to carry out market-oriented competition around digital technology and innovation capabilities. Figure 1: The unique advantages of Internet-based third-party payment institutions will be weakened.

Source: IMF, Wind, ICBC International

China is already the world’s largest trading nation and second largest economy by 2020, but there is still a significant gap between the RMB’s international currency status and that of the US dollar. According to IMF research, the current status of the U.S. dollar as a global reserve currency is still solid, mainly based on the depth of openness of its financial markets and the strong currency inertia formed over the past years, but learning from history, technological advances, led by digital currency, may become an important force to quickly break free from the inertia. The digital renminbi is a digital form of the central bank.

The digital renminbi is a digital form of liability for central banks, and its advantage lies not only in enhancing payment efficiency, but also in reducing intermediary-based credit risk and liquidity risk exposure. Facing a world dominated by the digital economy, the digital RMB is committed to becoming a new generation of financial infrastructure that is not only a vehicle for users to realize their digital needs, but also a starting point for the currency to adapt to the digital world. China has already gained a first-mover advantage in the digital economy, and if it can combine currency payments with diversified digital services and use the currency with cutting-edge services, it is expected to become the best entry point for international payments, fundamentally enhancing the international competitiveness of the RMB, shaking the international reserve currency status of the U.S. dollar and reducing dependence on the U.S. dollar-dominated global banking system.

Three break the time lag of policy transmission and provide precise control tools from aggregate to structure. The traditional monetary and fiscal policies are mainly aggregate in nature, and there is a time lag in the transmission to the real economy, which makes it difficult to monitor the flow of funds and easily triggers the idling of funds in the financial system. In addition, under the triple pressure of epidemic shock, economic recession and financial risk, the policy space of each country is gradually approaching the limit.

In 2020, China’s “direct access” economic policy has become one of the highlights of innovation, with monetary policy emphasizing “direct access to the real economy” and fiscal policy emphasizing “direct access to the grassroots in cities and counties”. By “direct access”, we mean speed and precision. The launch of digital RMB will help the policy reach directly with autonomous control, and become an important tool to break the time lag of transmission and achieve precise drip-feeding.

On the one hand, the digital RMB improves the monitoring of the whole process of issuing currency and provides quantitative reference for the formulation of monetary and fiscal policies through big data analysis. On the other hand, the traceability and expandability of digital RMB provide technical support for targeted policy transmission. For example, in the past, financial subsidies were distributed to governments at all levels through the bank account system, and local governments then allocated the funds to relief enterprises and people, but there was a time lag for local governments to report upwards, or there were inefficiencies in the distribution of funds and deviations in the use of funds. In the theoretical scenario of applying digital RMB, the central bank can track the proper use of each fund and turn off the tracking function to protect the privacy of subsequent use once the funds reach the end user. From the patents published by the central bank, the digital RMB also has the technical conditions to load smart contracts that can be triggered based on the state of the economy, loan rates, flow subjects and point-in-time conditions, thus effectively avoiding currency idling and enhancing the ability to provide financial services to the real economy.

The four ascending paths of the future digital RMB are becoming clearer and clearer after the break
First, the issue size may exceed 2 trillion under academic calculations. The digital RMB integrates various payment channels such as commercial banks and third-party payment institutions, and relies on the already mature online and offline payment scenarios for full penetration. Combined with the fact that digital RMB can be used in institutions as a form of issuance for various types of subsidies, the popularity of digital RMB may exceed expectations. Based on Alipay’s current universal penetration rate of about 65%, we assume that digital RMB penetration may reach 70% within ten years. It is worth noting that despite the high penetration rate, the average amount of digital RMB held by a single person will always be limited in order to prevent “narrow banking” and potential run risks. Publicly available materials show that the total balance of digital renminbi is capped at 10,000 RMB in anonymous situations and 500,000 RMB in real names, and additional registration procedures may be required to obtain a higher amount, so digital renminbi is still mainly covering daily consumption needs. Based on the 70% penetration rate and the assumption that the average amount held by a single person is RMB2,000, the number of digital RMBs issued in 2030 may exceed RMB2 trillion, accounting for about 6% of the base currency. And at the transaction level, the annual payment volume of digital RMB may exceed 20 trillion, accounting for more than 20% of total social consumption.

Second, it accelerates the digital transformation of traditional financial institutions. The digital RMB is a new type of financial infrastructure adapted to the digital economy, which will also contribute to the overall upgrading of the domestic financial system. On the one hand, the digital RMB will play a “catfish effect”, injecting fresh blood into the construction of a new financial infrastructure and stimulating traditional financial institutions to accelerate their digital transformation. Along with the transformation and upgrading of the underlying IT systems of commercial banks, digital collaboration among various departments will become more fluid, and the digitalization of the entire process is expected to bring about a dual improvement in business processing efficiency and risk management capabilities. On the other hand, digital RMB also creates a “pushback effect”, which accelerates the iterative upgrading of financial systems and forces traditional financial institutions to introduce technological elements in their business exploration, improve risk identification capabilities while focusing on optimizing client experience, and develop leading financial services adapted to the era of digital economy. Under the level playing field created by digital RMB, the established experience of fintech companies also provides samples and references for the digital transformation of traditional financial institutions, helping them to break away from the traditional model and seek evolution.

Third, it opens the era of enterprise mutual trust payment. In the past decade, the platform-based consumer Internet has developed rapidly, but its essence is still focused on improving the efficiency of traditional economic activities, and has recently shown the characteristics of the tail end of the unfolding period when the traffic dividend has peaked. With the advent of the digital economy, the industrial Internet, with the interconnection of everything as its core, is expected to become the leading force of a new round of industrial revolution. Industrial payment and industrial Internet go hand in hand, and based on the higher quantitative and confidential nature of industrial Internet, industrial payment also needs to provide new solutions to match. On March 1, Beijing Microchip Institute of Blockchain and Edge Computing signed a strategic cooperation agreement with the Institute of Digital Currency of the People’s Bank of China. The two parties will promote the application of digital RMB enterprises based on China’s first independent and controllable blockchain software and hardware technology system “Chang’an Chain”. Based on the independent and controllable Chang’an Chain, the enterprise application of digital RMB will fundamentally solve the payment and trustworthiness problems between enterprises and empower the accelerated evolution of industrial Internet.

Fourthly, to seize the international digital currency competition, in April 2020, Libra (now renamed as Diem), which relies on the Internet ecology, retreated and abandoned the currency to protect the chain, and committed to become the financial infrastructure in the era of digital economy. The IMF report points out that the monetary substitution effect of a digital currency anchored by a single currency will be even stronger than that of traditional fiat currencies. Thus, it can be seen that the ascending competition of the new generation of international monetary system has been opened, and digital currency is one of the most important grips. Compared with Diem and digital dollar, digital RMB is less talked about ideally and more done to implement, and its pilot scope has been expanded to “10+1”, i.e. 10 cities + 1 winter Olympic scenario, or to take the first-mover advantage to overtake. On the one hand, the digital RMB draws on Diem’s Internet ecological effect, builds on the existing advantages of the domestic digital economy, actively cooperates with leading Internet enterprises, and accelerates penetration through different application scenarios; on the other hand, the digital RMB widely draws on the R&D experience of various countries and keeps polishing the technical details. Recently, China’s central bank participated in the BIS’s multilateral central bank digital currency bridge research project, exploring the interoperability of different countries’ central bank digital currency systems, which is expected to take the initiative in the global rule-making of central bank digital currency.


Boswell, E., Gamba, A., Hakobyan, S., Lusinyan, L., Meads, N., & Wu, Y. Reserve Currencies in an Evolving International Monetary System. System.
Digital Money Across Borders: Macro-financial Implications, IMF, 2020

Cheng, Shih, Chief Economist and Managing Director, ICBC International; Gao, Xinhong, Macroeconomic Analyst, ICBC International

This article represents the views of the authors only

Editor Feng Tao

Photo credit: Getty Images, courtesy of the authors

Cheng Shi and Gao Xinhong

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